Q&A: University funding

Decisions over university funding will shape higher education for years to come

Universities are struggling to accommodate growing student numbers amid budget cuts. The government is conducting a major rethink of England's higher education funding system, with former BP boss Lord Browne conducting an independent review of the options.

How bad is the current situation?

Demand for university places is surging year on year, but government spending cuts have meant universities are unable to expand to provide the places. Estimates suggest up to 200,000 applicants will not get places this year, more than ever before. Although these figures are notoriously hard to get right.

Universities enjoyed a period of expansion under Labour, who say spending rose more than 25% from 1997 to 2009. But in their last year in office, they started cutting, reducing funding by £449m for the year 2010-11.

Then the Conservative-Liberal Democrat coalition cut a further £211m, reducing 20,000 promised new university places to 10,000.

In addition, details are yet to be given of how 25% cuts across government departments, announced in the emergency budget, will affect higher education.

How are universities funded now?

Universities in England are currently allowed to charge home students £3,225 fees per year. This is initially paid to the university by the government, and then paid back through the tax system by students once their income reaches £15,000.

In the UK as a whole, income from fees - including fees paid directly by students such as postgraduates and overseas students - makes up about 29% of universities' total funding, which was £25.4bn in 2008/09.

Another 35% comes from government funding bodies, while the rest comes from other sources such as research grants, endowments and investments.

In addition, students are eligible for loans towards their maintenance costs, which they pay back in the same way as their fees.

What funding solutions have been proposed?

Under Labour, a cross-party review into university funding was set up, chaired by the former BP boss Lord Browne, which is due to report in the autumn. The party was accused of kicking the issue into the long grass until after the election.

The review had been widely expected to recommend raising the current cap on tuition fees. There has been speculation the new limit could be as much as £7,000, and that the review will suggest raising the subsidised repayment of student loans to a more commercial level of interest.

On 15 July, Universities Secretary Vince Cable said the coalition was keen to investigate the idea of a variable graduate contribution or tax.

He outlined a possible system where graduates would pay an increased rate of taxation, which would be higher for higher earners.

But senior Conservative sources later suggested the government was "unlikely" to back the idea.

Other moves to cut costs have also been mooted - two-year degrees, more students studying part-time, by distance learning or living at home, and expanding the role of private institutions.

Fees or graduate tax - what's the difference?

It depends on the details, and the terms are not always used clearly. Some unions have warned against the government "rebranding" fees as a graduate tax - and Mr Cable has said the current system is already a form of graduate tax, and that it is "misleadingly" referred to as a fee system.

At present, the amount paid by the student is the cost of his or her tuition fees - though this is paid up front by the government, not the university. Universities receive a set fee for every student they teach.

Under a graduate tax, the amount the student pays would be a percentage of his or her income, rather than a fixed amount linked to a specific university fee - so some students could end up paying more than the fees for their own degree.

The way the money was ringfenced and distributed to universities would be hotly debated - but would not necessarily mean universities received a set amount per student. It would not necessarily even mean the money was all set aside for higher education.

Mr Cable gave few details about which sort of graduate tax system he wanted to have considered.

He said it was "unlikely" that tax would be paid throughout a graduate's entire working life.

He also said students would not have to pay any fees up front and money coming back to the state through graduates' income tax would ultimately go to universities not the Treasury, but did not outline exactly how this would happen.

It was possible graduates from different universities could face different rates of tax - and pay variable amounts, he said, raising the prospect that Oxbridge graduates, for example, might pay more.

Senior Conservative sources later said the coalition government wanted to maintain the direct payment from the individual to the university, and that ministers believed it would be unfair for high-earning graduates to pay back more than the cost of their degrees.

What are the political factors involved?

The Lib Dems campaigned on a pledge to phase out tuition fees over six years. Individual MPs - including Mr Cable and the Deputy Prime Minister Nick Clegg - signed pre-election promises to oppose any increase in fees, which could put them in a tricky position if Lord Browne recommends a lifting of the current cap on tuition fees.

A graduate tax may offer the Lib Dems a way out of the predicament. But with senior Conservatives shedding doubt so soon after Mr Cable's announcement, Labour have accused the two coalition partners of squabbling over the issue.

What are the implications?

In the short-term and the current economic climate, universities are going to face challenging times and be squeezed further. If fees or graduate contributions do go up, it will be several years before students are repaying the cash into government coffers - and in the meantime the government will have to find extra funds to pay the raised fees.

Longer term, the policy choices made now will have far-reaching implications - on the shape and number of universities, the type of work that they do, the number of people who study, how they study and how accessible university is to low-income students.